Did Texas Court Botch Diversity of Citizenship Analysis?

Did Texas Court Botch Diversity of Citizenship Analysis?

      It may be that a Texas Circuit Court applied the wrong rule in its analysis of the citizenship of a limited liability company.  Ruelas v. Wal-Mart, 2013 WL 949344 (E.D. Tex. Jan. 30, 2013).

      In this Report and Recommendation by Magistrate Judge Mazzant, he was called upon to parse the ownership and therefore the citizenship of several Wal-Mart entities.  The plaintiff in this slip-and-fall action named Wal-Mart Stores, Texas, L.P., Wal-Mart Stores, Inc. and Wal-Mart Stores Texas, LLC as defendants.

      The Court dismissed consideration of Wal-Mart Stores Texas, L.P. on the basis that before the filing of the complaint this limited partnership had been merged with and into Wal-Mart Stores Texas, LLC, with the LLC being the surviving entity.  Ergo, the LP no longer existed at the time the action was filed.

      Applying Hertz v. Friend, 559 U.S. 77 (2010), Wal-Mart Stores, Inc. had the citizenship of its jurisdiction of organization (Delaware) and that of its principal place of business under the ‘nerve center’ test (Arkansas).

      That left for consideration Wal-Mart Stores Texas, LLC.  While noting its jurisdiction of organization (Delaware) and its principal place of business (Arkansas), the Court repeated the rule that an LLC’s citizenship is determined by that of its members.

      It was asserted that the LLC’s sole member is Wal-Mart Real Estate Business Trust, a Delaware statutory trust with its principal place of business in Arkansas.  It is then stated that Wal-Mart Property Co., a Delaware corporation with its principal place of business in Arkansas,   is the sole “owner” of the statutory trust.  “Owner” is not further explained – is it the same as trustee, beneficial owner, or something else?

      Here may be the first failure in the analysis.  To this point ownership of the initial LLC has been traced back to a single corporation.  Why, at this juncture, was Wal-Mart Stores Texas, LLC not ascribed the corporation’s citizenships (Delaware and Arkansas) and that be the end of the story?  Based on the facts presented that should have been the conclusion.

      The Court, however, continued its analysis, stating that Wal-Mart Stores East, LP is the sole “owner” (shareholder?) of Wal-Mart Property Co.  Wal-Mart Stores East, LP has as its general partner WSE Management, LLC and as its limited partner WSE Investments, LLC.  The sole member of each of WSE Management and WSE Investments is Wal-Mart Stores East, LLC.

      Here is where the analysis again seems to fail.  The Court wrote:

Wal-Mart Stores East, LLC is a limited liability company organized under the laws of the State of  Arkansas with its principal place of business in Arkansas.  Wal-Mart Stores East, LLC’s corporate office, financial records, and corporate books and records are located in Arkansas.  Therefore, Defendants offer the evidence that conclusively demonstrated Wal-Mart Store East, LLC is a citizen of Arkansas.

       But that is not the test.  An LLC is not a citizen of a particular jurisdiction by virtue of being organized or maintaining its principal place of business in that jurisdiction.  See, e.g., JMTR Enterprises, LLC v. Duchin, 42 F.Supp.2d 87 (D. Mass. 1999) (LLC not deemed a citizen of a state by virtue of being organized therein); Muhlenbeck v. KI, LLC, 304 F.Supp. 797 (E.D. Va. 2004) (“[T]he citizenship of a [LLC] depends not on the state in which it is organized or the state in which it does most of its business, but rather on the citizenship of the entities that own the LLC.”).  Rather, citizenship is determined by reference to that of the ultimate owners.  This decision did not address the members of Wal-Mart Stores East, LLC, applying rather (so it would seem) the test applied to corporations.

       Based on the information ultimately available, this decision, after a Herculean traipse through a Byzantine structure, the Court both continued past the point at which a determination could and should have been made and then stopped too soon and applied the wrong test to the assessment of citizenship.  The analytic path, it would seem, should have stopped at Wal-Mart Property Co., a corporation.  In continuing on to Wal-Mart Stores East, LLC, the Court then applied the wrong test.  By then, a conclusion as to citizenship would have been possible only by the further investigation of the citizenship of the members in Wal-Mart Stores East, LLC.

       The Magistrate’s Recommendation was adopted by the Circuit Court in an order dated March 8, 2013.  While the analysis appears to have been flawed, the outcome is not impacted in that Wal-Mart is not shown to be a Texas citizen and diversity does exist.